Fresh policy measures fail to reassure market participants over China growth

CNY: Building pessimism over China growth outlook driving FX market

The renminbi has continued to weaken at the start of this week resulting in USD/CNY rising back above the 7.3000-level as it moves back within touching distance of last week’s high at 7.3175. The ongoing sell-off for the renminbi continues to reflect building investor pessimism over the outlook for China’s economy. The loss of investor confidence in the outlook for China’s economy has also driven a sell-off in China-related equity markets overnight. The Hang Seng China Enterprise equity index has fallen to its lowest level November of last year and has extended its sell-off this month to around -14% from the high at the start of the month. It is not surprising that the commodity-related G10 currencies have been the worst performing so far this month with the Norwegian krone declining by -4.8% against the US dollar, the New Zealand dollar by -4.8% and the Australian dollar by -4.7%. The Canadian dollar which has been supported by the stronger than expected US economic data flow has held up relatively better (-2.6% vs. USD). A similar picture is also evident for emerging market currency performance so far this month. Commodity-related and Asian currencies that are more tightly linked to the outlook for China’s economy have underperformed     . The South African rand has declined by -6.1% against the US dollar, the Colombian peso by -5.8%, the South Korean won by -5.0%, the Brazilian real by -4.9%, the Chilean peso by -3.5%, and the Malaysian ringgit by -3.2%. 

Last week the Chinese government signalled more urgency to provide stimulus to support growth but the measures outlined so far have failed so far to stabilize investor confidence. Investor sentiment has not been helped at the start of this week by the surprise decision to leave the five-year loan prime rate unchanged at 4.2%. It had been expected that it would be lowered by 15bps similar to the decision last week to cut the medium-term lending facility rate. The last time they diverged was in August of last year. The one-year loan prime rate was still lowered by less than expected by 10bps. The developments still leave market participants waiting for more convincing policy measures to stimulate demand. As a result, China-related currencies remain vulnerable to further weakness in the near-term even after the sizeable adjustment that has already taken place so far this month.        

PMI STILL SIGNALLING WEAK GROWTH IN EURO-ZONE

Source: Macrobond & Bloomberg

USD: Jackson Hole the primary focus  

The schedule this week is relatively light and the main data releases will be on Wednesday with the release of the advance PMIs in Europe. The ECB has toned down its hawkishness quite notably and this has coincided with continued weak economic data. Further disappointment this week would reinforce the potential for the ECB remaining on hold at its meeting in September. The market is currently priced 50-50 on a 25bp hike at that meeting.

Outside of the data, the obvious main event this week will be the Jackson Hole symposium from 24^th-26^th August. As we highlighted in the FX Weekly (here) on Friday, we see limited scope for the Fed to use this platform for a dovish pivot. Fed Chair Powell will speak at 15:05 (BST) on Friday but given the flow of economic data that we have had since the FOMC meeting in July, there is little justification for turning more dovish. That scenario may well be certainly partially priced given yields in the US have continued to drift higher. Our text analysis of the FOMC minutes released last week (covered in the weekly) revealed reduced but still elevated mentions of inflation plus a reduction in references to financial conditions. Reduced references to financial conditions in the minutes may be a sign of less obvious signs of tighter financial conditions which could mean the Fed remains comfortable with communicating a hawkish message to the markets. Ahead of Powell’s speech toward the end of the week there will be other speakers as well. From the Fed we have confirmation of some media appearances on Thursday and Friday by Fed President Harker, who is a voter this year. Expect tough talking in general from Jackson Hole given the very limited evidence of a notable slowdown in the labour market and economic activity.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:00	M3 Money Supply	Jul	--	1,135.4M	!
GE	10:30	German 12-Month Bubill Auction	--	--	3.749%	!
GE	11:00	German Buba Monthly Report	--	--	--	!
CA	13:30	New Housing Price Index (MoM)	Jul	0.1%	0.1%	!!

 

Source: Bloomberg